Finance Ministry today said RBI's raising CRR became necessary due to increase in liquidity in the system as large sums of money in the form of scrapped Rs 500/1000 notes is being deposited by the public in banks.

The Reserve Bank on Saturday asked lenders to temporarily maintain an incremental cash reserve ratio (CRR) of 100 per cent to absorb excess liquidity from the system. CRR is the portion of the deposits which banks are required to park with RBI. The actual current rate of CRR is 4 per cent.

"Increase in CRR is a part of the liquidity management strategy used by the RBI. Perhaps it has become necessary in the context of excess liquidity in the system. As you know excess liquidity adds to the volatility in the currency market," Economic Affairs Secretary Shaktikanta Das told reporters here.

He said RBI has already given a proposal for increasing the Market Stabilisation Scheme (MSS) limit and "it is under the consideration of the government".

MSS, a tool to manage liquidity, has been fixed at Rs 30,000 crore for the current fiscal.

He said one thing "to be noted" is that bond yields and G-Sec rates in India were going down when almost in all other emerging markets the bond yields were going up in line with the US treasury bills and US bond rates.

"It is merely happening because of excessive liquidity that we have in the system. When the bond yields go down naturally there is tendency on the part of the people to take the money out into high yielding areas specially United States which offers higher yields," Das said.

Therefore, its impact was also being felt in the currency market and some quantum of outflow of FII and other investments could not have been ruled out, he said.

"To sum up I would say the next step which had become necessary in the context of excessive liquidity, it had become necessary to arrest the possible increase in volatility in the currency market," he added.

Das refrained from guessing on what RBI will do in its next monetary policy review due later next month.

He also did not reply to question regarding supplementary demand to be tabled by the government in the ongoing session.

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